CNY rally is not fundamentally justified – Commerzbank

According to analysts at Commerzbank, CNY has rallied over the past month, largely due to rising optimism that a deal seemed likely which would reduce the downside risks to the Chinese economy substantially.

Key Quotes

“In addition, the easing measures in China clearly suggest that the Chinese authorities are keen to prevent further growth deceleration. As such, the market expects that the Chinese economy will stabilize somewhat in the coming months, which has supported the Chinese currency.”

“However, we doubt that a sustained CNY appreciation is justified based on economic fundamentals. Notably, China’s Caixin manufacturing PMI, a gauge for the health of private firms, unexpectedly fell sharply to 48.3 in January 2019, down from the previous reading of 49.7.”

“The policies to bolster private companies (in particular targeted easing measures by the central bank PBoC) have not yet brought about any meaningful effect, indicating that the market might need to wait for a bit longer to see an economic stabilization in China. By spring, we expect to increasingly see signs that the supporting measures stabilize the economy.”